This was the Zillow Value Index and the number was down 3% from the previous
quarter, and down 8.2% from the previous year.

"Just 51% of Homeowners Believe Their Home is Worth More Than Mortgage" ~
Rasmussen Reports, May 17, 2011

At the worst, the figure was 61% in October 2009 and in December 2008. However,
in reviewing the previous month's report opinion is changing quickly. In looking
at the numbers in another way, 36% believed in April that their home was worth
less than the mortgage, which was up five (5) points from the March report.

Salient Features

The markets have, indeed, had a change in character as speculators became
fully leveraged for soaring prices, and suffered plunging prices. Quite likely
this has started another phase of "de-leveraging".

One of the most damaging has been silver's crash. More than something to trade,
silver's fall relative to gold is one of the indicators that the speculative
surge has completed.

Highs for hot commodities were sequential, with agricultural prices (GKX)
setting the high in early March, base metals (GYX) in early April and precious
metals at the end of April. These now appear as cyclical peaks in prices.

Stocks (SPX) set the high of 1370 at the end of April. The decline has been
modest, but equities are vulnerable to forces of financial gravity as well.

Corporate bond prices and spreads have also participated in the party that
arose out of the panic that ended in March 2009. This sector is again becoming
vulnerable to a seasonal turn to widening that often makes May the month to "go
away".

Momentum Peak Forecaster

This proprietary indicator went straight up the fall suggesting that speculation
would run to excess. Called the Forecaster, it reversed in early January which
signaled buying could reach a frenzy some two to three months later. This would
center around March as all items would not peak at the same time. Other methods
suggested that precious metals could run as some commodity groups lagged and
crude oil could rally through April.

As it turned out, the action climaxed as crude completed seasonal strength
at the end of April.

Other than anticipating a surge in speculation and its conclusion, the Forecaster
has also made the call on the start of the recession - particularly when the
speculation focuses on commodities.

The model is updated below:

FORECASTERCommodity Speculation and Recessions

The reversal in the Forecaster to down provides the signal.

Typically, the peak of speculation has been associated with the test of
the reversal a couple of months later.

Signal

Recession Start

NBER Announcement

Dec/69

Dec/69

*

Nov/73

Nov/73

*

Nov/79

Jan/80

June/80

Jan/11

??

??

The initial reversal was set in November 1979 and the test was completed
in January 1980.

The initial reversal occurred in January 2011 and the test completed at
the end of April.

INTEREST RATES

Ross has enlightened technical research with some illustrative titles. The
August 24, 2010 ChartWorks (CW) boldly headlined "BYE-BYE BONDS" as in goodbye
bonds, or sayonara, or get out! That week set the top of the treasury bond
market at 136.84.

The decline was 10 points to 117 in early February when the ChartWorks headline
was "BUY-BUY BONDS". This requires no interpretation and though coincidental
was timed with some of Pimco's most bearish comments on the long bond.

On the latest rally, the obvious target as commodity speculation lost momentum
would be the 125 level and this has been reached. There is a fair amount of
resistance that could force a trading range for a while.

Higher bond prices with lower commodities seem possible.

Over in the credit risk side, the action in corporates has been good on the
fabulous rebound out of the crash. Since year-end the high-yield has declined
from 7.51% to 6.66%, as the spread narrowed from 418 bps to 354 bps.

This is vulnerable to a change in sentiment, which could be followed by the
discovery of risk - again - in the sub-prime. This week the issue (AAA-02-02)
we thought would be the indicator has taken out the previous low. This was
the "sell" for us on all spread products in 2007 and it is now.

This is backed up by Ross's "sell" (CW, May 18) on municipals. Munis (MUB)
have rallied from 94 on disaster headlines in mid-January to 104 yesterday.

Often seasonal forces will narrow spreads into May and then reverse to widening.
This and the Forecaster worked very well for us in 1998 when LTCM self-destructed
on the bizarre notion that European spreads could be narrowed by government
edict.

Historically, a dramatic plunge in silver relative to gold has anticipated
the next liquidity crisis. It is inevitable that this will appear in all risk
markets.

But to look to the brighter side, it could prompt a brief "flight to quality" move
into longer-dated treasuries.

It is essential to understand that as with any recession, this one follows
over-speculation and is not due to policymakers tightening. Quite tediously,
the establishment could soon lay the blame upon "talk" of ending QEII.

Shorted-dated rates are still declining. Dealer commercial paper rates have
dropped from 0.54% last summer to 0.23% in April. The number is now at 0.20%.
This could be reflecting extreme accommodation by financial adventures at the
Fed and Treasury.

Similarly Libor has declined from 0.539% to 0.260% today.

In May-June 2007, these rates increased when troubles started and liquidity
began to vanish. Could happen again.

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
guarantee its accuracy or completeness. This research report is prepared for
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